Question

MaxiCare Corporation, a not-for-profit organization, specializes in health care for senior citizens. Management is considering whether to expand operations by opening a new chain of care centers in the inner city of large metropolitan areas. For a new facility, initial cash outlays for lease, renovations, net working capital, training, and other costs are expected to be about $17 million. The corporation expects the cash inflows of each new facility in its first year of operation to equal the initial investment outlay for the facility. Net cash inflows are expected to increase to $4.0 million in each of years 2 and 3; $2.5 million in year 4; and $3.0 million in each of years 5 through 10. The lease agreement for the facility will expire at the end of year 10, and MaxiCare expects the cost to close a facility will pretty much exhaust all cash proceeds from the disposal. Cost of capital for MaxiCare is estimated as 12%. Assume that all cash flows occur at year end. Required: 7. Compute (using the built-in NPV function in Excel) the net present value (NPV) the proposed investment. (Negative amount should be indicated by a minus sign. Enter your answer in whole dollars, not in millions, rounded to nearest whole dollar.) 2. Compute (using the built-in IRR function in Excel) the internal rate of return (IRR) for the proposed investment. (Round your final answer 2 decimal places. (i.e. 1234 = 12.34%)) 3. What is the breakeven selling price for this investment, that is, the price that would yield an NPV of $0? (Use the Goal Seek function in Excel to determine the breakeven selling price. The following online tutorial may be helpful to you: Goal Seek Tutorial.) (Enter your answer in whole dollars, not in millions, rounded to nearest whole dollar.) 1. Estimated NPV Estimated IRR Breakeven selling price 2

Answer 1

Dear Student , below complete calculation of Net present value for new project along with IRR calculation method . Always good to calculate IRR in excel sheet with below formula IRR = SUM OF CASH INFLOW AND CASH OUTFLOW

Maxi care Corporation - a Non Profit organization
To open new chain care - need new facility
initial Cash outlay lease , renovation etc - $ 17 Mio
Projected cash inflow obver the 10 years time in multiple phase wise
the lease agreement will be over 10 years period
Cost of capital @ 12%
First need to derived Net present Value of this project
Discount factor		12%
	Year	Cash flow movement $ A	PV factor-B	Value$ (A*B)
Initial Investemnt	0	-1,70,00,000	1	-1,70,00,000
Cash inflow	1	-	0.8929	-
Cash inflow	2	40,00,000	0.7972	31,88,776
Cash inflow	3	40,00,000	0.7118	28,47,121
Cash inflow	4	25,00,000	0.6355	15,88,795
Cash inflow	5	30,00,000	0.5674	17,02,281
Cash inflow	6	30,00,000	0.5066	15,19,893
Cash inflow	7	30,00,000	0.4523	13,57,048
Cash inflow	8	30,00,000	0.4039	12,11,650
Cash inflow	9	30,00,000	0.3606	10,81,830
Cash inflow	10	30,00,000	0.3220	9,65,920
NEGATIVE NPV				-15,36,687
So as per above calculation , NPV is showing NEGATIVE . ($15,36,687)
IRR Calcuate is Sum of ( Cash Inflow and Cash Outflow )		9.928%
( in the above case
to derived IRR , need to sum total Cash inflow and cash outflow ) and derived IRR rate
	Year	Cash flow movement $ A
Initial Investemnt	0	-1,70,00,000
Cash inflow	1	-
Cash inflow	2	40,00,000
Cash inflow	3	40,00,000
Cash inflow	4	25,00,000
Cash inflow	5	30,00,000
Cash inflow	6	30,00,000
Cash inflow	7	30,00,000
Cash inflow	8	30,00,000
Cash inflow	9	30,00,000
Cash inflow	10	30,00,000
IRR		9.928%

Break even Selling price = PV of all Cash inflow $ 15463313

	Year	Cash flow movement $ A	PV factor-B	Value$ (A*B)
Cash inflow	1	-	0.8929	-
Cash inflow	2	40,00,000	0.7972	31,88,776
Cash inflow	3	40,00,000	0.7118	28,47,121
Cash inflow	4	25,00,000	0.6355	15,88,795
Cash inflow	5	30,00,000	0.5674	17,02,281
Cash inflow	6	30,00,000	0.5066	15,19,893
Cash inflow	7	30,00,000	0.4523	13,57,048
Cash inflow	8	30,00,000	0.4039	12,11,650
Cash inflow	9	30,00,000	0.3606	10,81,830
Cash inflow	10	30,00,000	0.3220	9,65,920
Break even Sales point				1,54,63,313

After consider above Break even Sales point value as cash outflow , we can see , NPv is at break even point as below

	Year	Cash flow movement $ A	PV factor-B	Value$ (A*B)
Initial Investemnt	0	-1,54,63,313	1	-1,54,63,313
Cash inflow	1	-	0.8929	-
Cash inflow	2	40,00,000	0.7972	31,88,776
Cash inflow	3	40,00,000	0.7118	28,47,121
Cash inflow	4	25,00,000	0.6355	15,88,795
Cash inflow	5	30,00,000	0.5674	17,02,281
Cash inflow	6	30,00,000	0.5066	15,19,893
Cash inflow	7	30,00,000	0.4523	13,57,048
Cash inflow	8	30,00,000	0.4039	12,11,650
Cash inflow	9	30,00,000	0.3606	10,81,830
Cash inflow	10	30,00,000	0.3220	9,65,920
NPV Break Even				-